UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT INVESTMENT COMPANIES
Investment Company Act file number 811-7686
SALOMON BROTHERS EMERGING MARKETS INCOME FUND II INC.
(Exact name of registrant as specified in charter)
125 Broad Street, New York, NY 10004
(Address of principal executive offices) (Zip code)
Robert I. Frenkel, Esq.
Salomon Brothers Asset Management Inc
300 First Stamford Place
Stamford, CT 06902
(Name and address of agent for service)
Registrant's telephone number, including area code: (800) 725-6666
Date of fiscal year end: MAY 31
Date of reporting period: MAY 31, 2004
ITEM 1. REPORT TO STOCKHOLDERS.
The ANNUAL Report to Stockholders is filed herewith.
SALOMON BROTHERS EMERGING MARKETS INCOME FUND II INC.
Letter from the Chairman
PICTURE
R. JAY GERKEN, CFA
R. JAY GERKEN, CFA
Chairman and
Chief Executive Officer
DEAR SHAREHOLDER,
Generally, emerging markets performed well early in the past year but pulled
back somewhat in the summer of 2003 amid a sell-off in the U.S. Treasury bond
market and fears that the American economy was growing too quickly. Sovereign
debt markets rebounded through the fall and early winter, as Treasury markets
stabilized and investors refocused their attention on the strong and improving
fundamentals in emerging market economies. However, these markets suffered a
second sell-off in April and May 2004, which was driven almost entirely by
technical factors, as many traders reacted to the upward interest rate pressure
by selling their emerging markets debt positions in an effort to take profits,
unwind existing leveraged positions, and decrease their overall risk.
Although the performance of emerging markets bonds suffered this past spring,
the underlying market fundamentals, with rare exception, remained strong.
Strength in commodity prices supported emerging markets valuations. Latin
American countries, which constitute close to 59% of the market, as represented
by J.P. Morgan Emerging Markets Bond Index Plus ("EMBI+"), /i/ particularly
benefited from high commodity prices, as approximately one-third of the region's
exports are commodity based. These markets also benefited from
better-than-expected global economic growth.
The fund modestly outperformed its benchmark over the period, primarily as a
result of the manager's positioning of assets within various emerging markets.
The fund also benefited from its overall exposure to Latin America relative to
the index. When selecting securities, the manager continued to employ a barbell
approach to diversification that entailed overweighting more stable credits,
such as Panama and Morocco, with selective overweight positions in more
credit-sensitive issuers, such as Ecuador, Brazil and Colombia. However, the
fund slightly lagged the average return of the Lipper emerging markets debt fund
category. /ii/
Please read on for a more detailed look at prevailing economic and market
conditions during the fiscal year and to learn how those conditions and changes
made to the portfolio during this time may have affected fund performance.
INFORMATION ABOUT YOUR FUND
In recent months several issues in the mutual fund industry have come under the
scrutiny of federal and state regulators. The fund's Adviser and some of its
affiliates have received requests for information from various government
regulators regarding market timing, late trading, fees and other mutual fund
issues in connection with various investigations. The fund has been informed
that the Adviser and its affiliates are responding to those information
requests, but are not in a position to predict the outcome of these requests and
investigations.
In November 2003, Citigroup Asset Management disclosed an investigation by the
Securities and Exchange Commission ("SEC") and the U.S. Attorney relating to
Citigroup Asset Management's entry into the transfer agency business during
1997-1999. On July 20, 2004, Citigroup disclosed that it had been notified by
the Staff of the SEC that the Staff is considering recommending a civil
injunctive action and/or an administrative proceeding against certain advisory
and transfer agent entities affiliated with Citigroup relating to the creation
and operation of its internal transfer agent unit to serve primarily the Smith
Barney family of mutual funds. This internal transfer agent did not provide
services to the Fund.
SALOMON BROTHERS EMERGING MARKETS INCOME FUND II INC.
Citigroup is cooperating with the SEC and will seek to resolve this matter in
discussion with the SEC Staff. Although there can be no assurance, Citigroup
does not believe that this matter will have a material adverse effect on the
fund.
As always, thank you for your confidence in our stewardship of your assets. We
look forward to helping you continue to meet your financial goals.
Sincerely,
/s/ R. Jay Gerken, CFA
R. Jay Gerken, CFA
Chairman and Chief Executive Officer
July 20, 2004
MANAGER OVERVIEW
PERFORMANCE REVIEW
During the 12 months ended May 31, 2004, the fund returned 3.38%, based on its
New York Stock Exchange ("NYSE") market price and 4.11% based on its net asset
value ("NAV") /iii/ per share. In comparison, its benchmark the EMBI+ returned
3.14% and its Lipper emerging markets debt closed-end funds category average was
5.08% over the same time frame. Please note that Lipper performance returns are
based on each fund's NAV.
FUND PERFORMANCE
AS OF MAY 31, 2004
Annualized 12-Month
30-Day Distribution Total
Price Per Share SEC Yield Yield Return
$12.84 (NAV) 9.93% 12.85% 4.11%
$14.40 (NYSE) 8.84% 11.46% 3.38%
ALL FIGURES REPRESENT PAST PERFORMANCE AND ARE NOT A GUARANTEE OF FUTURE
RESULTS. THE FUND'S YIELDS WILL VARY.
Total returns are based on changes in NAV or market price, respectively. Total
returns assume the reinvestment of all dividends and/or capital gains
distributions, if any, in additional shares. Annualized distribution yield is
the fund's current monthly income dividend rate, annualized, and then divided by
the NAV or the market price noted in this report. The "SEC yield" is a return
figure often quoted by bond and other fixed income mutual funds. This quotation
is based on the most recent 30-day (or one month) period covered by the fund's
filings with the SEC. The yield figure reflects the dividends and interest
earned during the period after deduction of the fund's expenses for the period.
The annualized distribution yield assumes a quarterly income dividend rate of
$0.4125 for 12 months. These yields are as of May 31, 2004 and are subject to
change.
SALOMON BROTHERS EMERGING MARKETS INCOME FUND II INC.
During the 12-month period, the fund distributed dividends to shareholders
totaling $1.65 per share. The performance table shows the fund's 30-day SEC and
annualized distribution yields as well as its 12-month total return based on its
NAV and market price as of May 31, 2004. PAST PERFORMANCE IS NO GUARANTEE OF
FUTURE RESULTS. THE FUND'S YIELDS WILL VARY.
MARKET OVERVIEW
Emerging markets debt returned a tepid 3.14% during the fund's fiscal year as
represented by the EMBI+. Emerging markets performed well early in the 12-month
period ended May 31, 2004, but pulled back somewhat in the summer of 2003 amid a
sell-off in the U.S. Treasury bond market and fears that the American economy
was growing too quickly. Sovereign debt markets rebounded somewhat through the
fall and early winter, as Treasury markets stabilized and investors refocused
their attention on the strong and improving fundamentals in emerging market
economies. However, emerging market bonds suffered a second sell-off early in
2004. April saw the EMBI+'s largest sell-off since July of 2001, with spreads
over U.S. Treasuries widening to levels not seen since October of last year (in
other words, the gap between emerging bond yields and those on comparable
Treasuries increased as the selling pressure on emerging debt drove their yields
higher). This sell-off was driven almost entirely by technical factors, as many
traders reacted to the upward interest rate pressure by selling their emerging
markets debt positions in an effort to take profits, unwind existing leveraged
positions, and decrease their overall risk.
Despite the market tumult, emerging markets debt fundamentals remained strong,
and the markets benefited from increasing signs of a global economic turnaround.
Continued strength in commodity prices, including metals, agriculture and oil,
provided positive support for many emerging market countries (commodities are
the foundation of many developing country economies). Oil prices, in particular,
remained high, favoring oil exporters, but fears remained that high-energy
prices might dampen the global recovery. Oil revenues contributed to positive
performance in Ecuador, Russia and Venezuela.
Spreads tightened during the 12-month period ended May 31, 2004, closing at 508
basis points over U.S. Treasuries (in other words, over the full year, the gap
in yields between emerging bonds and comparable U.S. Treasures decreased, with
emerging bonds yielding 5.08 percentage points higher than Treasuries). Over the
same period, 12-month return volatility stood at 8.73% /iv/, substantially below
long-term historical levels of 16%, yet another indication that emerging markets
continue to be viewed as a more stable asset class.
FACTORS IMPACTING FUND PERFORMANCE
The fund's overweight positions in Ecuador and Brazil were the primary
contributors to its outperformance versus the benchmark index in the 12-month
period ended May 31, 2004. The fund's longstanding underweight in Argentina and
tactical underweight in Russia also positively contributed to performance, as
Argentine and Russian debt underperformed the market through the period. The
fund's underweight position in Venezuela during the early part of the 12-month
period detracted from our relative fund performance; however, we increased our
position in Venezuela to market (equal) weight in the latter part of the period.
While we maintained our positive outlook on emerging markets debt through the
past 12 months, we reduced the extent of the fund's overweight to the market as
spreads tightened over the course of the 12 months. Specifically, we reduced the
magnitude of the fund's overweight in Ecuador and Brazil in December, primarily
through security selection. As of the period's close, the yields on emerging
markets debt securities remained competitive to those on many other classes of
fixed-income securities.
SALOMON BROTHERS EMERGING MARKETS INCOME FUND II INC.
LOOKING FOR ADDITIONAL INFORMATION?
The fund is traded under the symbol "EDF" and its closing market price is
available in most newspapers under the NYSE listings. The daily NAV is available
online under symbol XEDFX. Barron's and The Wall Street Journal's Monday
editions carry closed-end fund tables that will provide additional information.
In addition, the fund issues a quarterly press release that can be found on most
major financial web sites as well as www.sbam.com.
In a continuing effort to provide information concerning the fund, shareholders
may call 1-888-777-0102 or 1-800-SALOMON (toll free), Monday through Friday from
8:00 a.m. to 6:00 p.m. Eastern Time, for the fund's current NAV, market price
and other information.
Thank you for your investment in the Salomon Brothers Emerging Markets Income
Fund II Inc. We appreciate that you have entrusted us to manage your money and
value our relationship with you.
Sincerely,
/s/ Peter J. Wilby /s/ James E. Craige
Peter J. Wilby, CFA James E. Craige, CFA
President Executive Vice President
June 16, 2004
The information provided is not intended to be a forecast of future events, a
guarantee of future results or investment advice. Views expressed may differ
from those of the firm as a whole.
Portfolio holdings and breakdowns are as of May 31, 2004 and are subject to
change. Please refer to pages 5 through 8 for a list and percentage breakdown of
the fund's holdings.
RISKS: Foreign stocks are subject to certain risks of overseas investing
including currency fluctuations and changes in political and economic
conditions, which could result in significant market fluctuations. These risks
are magnified in emerging or developing markets. High yield bonds are subject to
additional risks such as the increased risk of default and greater volatility
because of the lower credit quality of the issues.
All index performance reflects no deduction for fees, expenses or taxes. Please
note that an investor cannot invest directly in an index.
i The J.P. Morgan Emerging Markets Bond Index Plus is a total return index
that tracks the traded market for U.S. dollar-denominated Brady and other
similar sovereign restructured bonds traded in the emerging markets.
ii Lipper, Inc. is a major independent mutual-fund tracking organization.
Returns are based on the 12-month period ended May 31, 2004, calculated
among the 12 funds in the fund's Lipper category including the reinvestment
of dividends and capital gains, if any.
iii NAV is a price that reflects the value of the fund's underlying portfolio
plus other assets, less the fund's liabilities. However, the price at which
an investor may buy or sell shares of the fund is at the fund's market price
as determined by supply of and demand for the fund's common shares, which
may be more or less than the fund's NAV.
PAGE 4
SALOMON BROTHERS EMERGING MARKETS INCOME FUND II INC.
Schedule of Investments
May 31, 2004
FACE
AMOUNT SECURITY(a) VALUE
-----------------------------------------------------------------------------------------------------
Sovereign Bonds -- 90.0%
Argentina -- 1.4%
Republic of Argentina, Series L:
$ 6,650,000 6.000% due 3/31/23 (b) ................................... $ 3,441,375
5,025,000 DISC, 2.4375% due 3/31/23 (b)(c) ......................... 2,631,844
------------
6,073,219
------------
Brazil -- 22.8%
Federal Republic of Brazil:
22,580,000 12.250% due 3/6/30 ....................................... 22,563,065
3,175,000 11.000% due 8/17/40 ...................................... 2,861,468
52,282,087 C Bond, 8.000% due 4/15/14 ............................... 46,694,439
2,578,824 DCB, Series L, 2.125% due 4/15/12 (c) .................... 2,125,918
FLIRB, Series L:
9,556,154 Bearer, 2.0625% due 4/15/09 (c) ........................ 8,457,196
21,683,077 Registered, 2.0625% due 4/15/09 (c) .................... 19,189,523
------------
101,891,609
------------
Bulgaria -- 1.5%
6,075,000 Republic of Bulgaria, 8.250% due 1/15/15 .................... 6,849,562
------------
Colombia -- 4.8%
Republic of Colombia:
800,000 10.750% due 1/15/13....................................... 839,000
22,050,000 10.375% due 1/28/33 ...................................... 20,671,875
------------
21,510,875
------------
Costa Rica -- 1.9%
Republic of Costa Rica:
6,000,000 8.050% due 1/31/13 ....................................... 6,240,000
1,625,000 6.548% due 3/20/14 ....................................... 1,495,000
800,000 9.995% due 8/1/20 (d)..................................... 884,000
------------
8,619,000
------------
Dominican Republic -- 0.6%
3,650,000 Dominican Republic, 9.500% due 9/27/06 ...................... 2,810,500
------------
Ecuador -- 4.9%
Republic of Ecuador:
20,775,000 12.000% due 11/15/12 ..................................... 18,801,375
4,005,000 7.000% due 8/15/30 (c) ................................... 2,823,525
------------
21,624,900
------------
--------------------------------------------------------------------------------
SEE NOTES TO FINANCIAL STATEMENTS.
PAGE 5
SALOMON BROTHERS EMERGING MARKETS INCOME FUND II INC.
Schedule of Investments (continued)
May 31, 2004
FACE
AMOUNT SECURITY(a) VALUE
----------------------------------------------------------------------------------------------------
El Salvador -- 1.5%
Republic of El Salvador:
$ 3,650,000 7.750% due 1/24/23 ....................................... $ 3,796,000
2,975,000 8.250% due 4/10/32 ....................................... 2,781,625
------------
6,577,625
------------
Malaysia -- 0.8%
2,975,000 Malaysia, 7.500% due 7/15/11 ................................ 3,357,469
------------
Mexico -- 11.2%
United Mexican States:
4,000,000 7.500% due 1/14/12 ....................................... 4,334,000
6,185,000 6.375% due 1/16/13 ....................................... 6,194,277
7,748,000 5.875% due 1/15/14 ....................................... 7,449,702
7,100,000 6.625% due 3/3/15 ........................................ 7,085,800
23,895,000 8.300% due 8/15/31 ....................................... 25,089,750
------------
50,153,529
------------
Panama -- 5.0%
Republic of Panama:
7,926,000 9.375% due 1/16/23 ....................................... 8,044,890
7,500,000 8.875% due 9/30/27 ....................................... 7,256,250
4,890,000 9.375% due 4/1/29 ........................................ 5,366,775
1,644,406 IRB, 2.000% due 7/17/14 (c) .............................. 1,531,254
------------
22,199,169
------------
Peru -- 3.1%
Republic of Peru:
4,500,000 FLIRB, 4.500% due 3/7/17 (c) ............................. 3,600,000
12,307,750 PDI, 5.000% due 3/7/17 (c) ............................... 10,400,049
------------
14,000,049
------------
Philippines -- 5.0%
Republic of Philippines:
18,000,000 8.250% due 1/15/14 ....................................... 16,987,500
5,025,000 10.625% due 3/16/25 ...................................... 5,163,187
------------
22,150,687
------------
Russia -- 16.2%
Russian Federation:
6,935,000 11.000% due 7/24/18 ...................................... 8,738,100
70,040,000 5.000% due 3/31/30 (c)(a) ................................ 63,692,625
------------
72,430,725
------------
--------------------------------------------------------------------------------
SEE NOTES TO FINANCIAL STATEMENTS.
PAGE 6
SALOMON BROTHERS EMERGING MARKETS INCOME FUND II INC.
Schedule of Investments (continued)
May 31, 2004
FACE
AMOUNT SECURITY(a) VALUE
----------------------------------------------------------------------------------------------------
Turkey -- 4.7%
Republic of Turkey:
$18,750,000 9.500% due 1/15/14 ....................................... $ 18,750,000
1,850,000 11.875% due 1/15/30 ...................................... 2,139,063
------------
20,889,063
------------
Venezuela -- 4.6%
Republic of Venezuela:
3,925,000 5.375% due 8/7/10 ........................................ 3,052,669
12,250,000 9.250% due 9/15/27 ....................................... 10,283,875
6,190,275 DCB, Series DL, 2.125% due 12/18/07 (c) .................. 5,834,334
857,100 FLIRB, Series A, 2.0625% due 3/31/07 (c).................. 805,674
850,000 Series A, 6.750% due 3/31/20.............................. 743,484
------------
20,720,036
------------
Total Sovereign Bonds (Cost -- $427,984,872) ................ 401,858,017
------------
Loan Participations (e) -- 3.9%
Jamaica -- 0.1%
343,750 Government of Jamaica, Tranche B, 2.063% due 11/15/04
(J.P. Morgan Chase & Co.) (c).............................. 333,438
------------
Morocco -- 3.3%
15,217,692 Kingdom of Morocco, Tranche A, 2.03125% due 1/2/09
(CS First Boston Corp., J.P. Morgan Chase & Co., and
UBS Financial Services Inc.) (c).......................... 14,951,382
------------
Russia -- 0.5%
3,000,000 Russian Government, Foreign Trade Obligation, zero coupon
due 12/31/20 (Bank of America) (f)........................ 2,370,000
------------
Total Loan Participations (Cost -- $17,219,297) ............. 17,654,820
------------
Corporate Bonds -- 5.6%
Malaysia -- 0.5%
1,975,000 Petronas Capital Ltd., 7.875% due 5/22/22.................... 2,159,163
------------
Mexico -- 5.1%
18,300,000 PEMEX, Project Funding Master Trust, 7.375% due 12/15/14 .... 18,917,625
3,300,000 Petroleos Mexicanos, 9.500% due 9/15/27 ..................... 3,745,500
------------
22,663,125
------------
Total Corporate Bonds (Cost -- $26,244,488) ................. 24,822,288
------------
--------------------------------------------------------------------------------
SEE NOTES TO FINANCIAL STATEMENTS.
PAGE 7
SALOMON BROTHERS EMERGING MARKETS INCOME FUND II INC.
Schedule of Investments (continued)
May 31, 2004
RIGHTS/
WARRANTS SECURITY (a) VALUE
-----------------------------------------------------------------------------------------------------
Rights and Warrants (f)(g) -- 0.0%
2,000 Warrants Asia Pulp & Paper (Exercise price of $7.8375 per share expiring
on 3/15/05. Each warrant exercisable for 12.914 shares of
common stock.) (d)........................................... $ 0
55,335 Rights Venezuela Discount Rights ..................................... 0
------------
Total Rights and Warrants (Cost -- $0)......................... 0
------------
FACE
AMOUNT
-------------
Repurchase Agreement -- 0.5%
$2,365,000 Deutsche Bank Securities Inc. dated 5/28/04,
1.020% due 6/1/04; Proceeds at maturity -- $2,365,268;
(Fully collateralized by various U.S. Treasury obligations,
0.000% to 8.750% due 6/8/04 to 9/15/29;
Market value -- $2,412,300) (Cost -- $2,365,000)............. 2,365,000
------------
Total Investments -- 100.0% (Cost -- $473,813,657*)............ $446,700,125
============
----------
(a) All or a portion of these securities are segregated as collateral pursuant
to a revolving credit facility or reverse repurchase agreements.
(b) Security is currently in default.
(c) Rate shown reflects current rate on variable rate instruments or instruments
with step coupon rates.
(d) Security is exempt from registration under Rule 144A of the Securities Act
of 1933. This security may be resold in transactions that are exempt from
registration, normally to qualified institutional buyers. This security has
been deemed liquid pursuant to guidelines approved by the Board of
Directors.
(e) Participation interests were acquired through the financial institutions
indicated parenthetically.
(f) Security is valued in accordance with fair valuation procedures.
(g) Non-income producing security.
* Aggregate cost for Federal income tax purposes is $474,620,224.
Abbreviations used in this schedule:
-------------------------------------
C Bond -- Capitalization Bond
DCB -- Debt Conversion Bond
DISC -- Discount Bond
FLIRB -- Front Loaded Interest Reduction Bond
IRB -- Interest Reduction Bond
PDI -- Past Due Interest
--------------------------------------------------------------------------------
SEE NOTES TO FINANCIAL STATEMENTS.
PAGE 8
SALOMON BROTHERS EMERGING MARKETS INCOME FUND II INC.
Statement of Assets and Liabilities
May 31, 2004
ASSETS:
Investments, at value (Cost -- $473,813,657)....................................... $446,700,125
Cash............................................................................... 2,925,290
Interest receivable................................................................ 8,499,327
Receivable for securities sold..................................................... 7,864,941
Receivable from broker -- variation margin......................................... 1,160,156
Prepaid expenses................................................................... 9,863
------------
TOTAL ASSETS....................................................................... 467,159,702
------------
LIABILITIES:
Loan payable (Note 4).............................................................. 100,000,000
Payable for open reverse repurchase agreement (Note 7)............................. 50,375,000
Payable for securities purchased................................................... 3,946,285
Interest payable (Note 4 and 7).................................................... 562,288
Management fee payable ............................................................ 276,192
Accrued expenses................................................................... 285,803
------------
TOTAL LIABILITIES.................................................................. 155,445,568
------------
TOTAL NET ASSETS..................................................................... $311,714,134
============
NET ASSETS:
Par value of capital shares ($0.001 par value, 100,000,000 shares authorized;
24,270,614 shares outstanding)..................................................... $ 24,271
Capital paid in excess of par value................................................ 327,918,536
Undistributed net investment income................................................ 5,677,539
Accumulated net realized loss from investment transactions, options and
futures contracts.................................................................. (6,950,308)
Net unrealized depreciation on investments and futures contracts................... (14,955,904)
------------
TOTAL NET ASSETS..................................................................... $311,714,134
============
Net Asset Value, per share ($331,714,134 / 24,270,614 shares outstanding)............ $12.84
======
--------------------------------------------------------------------------------
SEE NOTES TO FINANCIAL STATEMENTS.
PAGE 9
SALOMON BROTHERS EMERGING MARKETS INCOME FUND II INC.
Statement of Operations
For the Year Ended May 31, 2004
INCOME:
Interest........................................................................... $37,089,535
-----------
EXPENSES:
Management fee (Note 2)............................................................ 3,484,368
Interest expense (Note 4 and 7).................................................... 2,567,606
Custody............................................................................ 141,039
Audit and legal.................................................................... 124,201
Shareholder communications......................................................... 111,185
Directors' fees ................................................................... 68,210
Listing fees....................................................................... 33,526
Transfer agency services........................................................... 25,539
Loan fees.......................................................................... 8,197
Insurance.......................................................................... 6,149
Other.............................................................................. 9,772
-----------
TOTAL EXPENSES..................................................................... 6,579,792
-----------
NET INVESTMENT INCOME................................................................ 30,509,743
-----------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS, OPTIONS,
FUTURES CONTRACTS AND FOREIGN CURRENCIES (NOTES 1, 3, 6, AND 9):
Realized Gain (Loss) From:
Investment transactions ......................................................... 45,948,681
Options written.................................................................. 238,513
Futures contracts................................................................ (11,745,805)
Foreign currency transactions.................................................... (55,712)
-----------
NET REALIZED GAIN.................................................................. 34,385,677
-----------
Change in Net Unrealized Depreciation From:
Investments...................................................................... (62,539,119)
Futures contracts................................................................ 12,157,628
Foreign currencies............................................................... 55,797
-----------
INCREASE IN NET UNREALIZED DEPRECIATION............................................ (50,325,694)
-----------
NET LOSS ON INVESTMENTS, OPTIONS, FUTURES CONTRACTS AND FOREIGN CURRENCIES .......... (15,940,017)
-----------
INCREASE IN NET ASSETS FROM OPERATIONS .............................................. $14,569,726
===========
--------------------------------------------------------------------------------
SEE NOTES TO FINANCIAL STATEMENTS.
PAGE 10
SALOMON BROTHERS EMERGING MARKETS INCOME FUND II INC.
Statements of Changes in Net Assets
For the Years Ended May 31,
2004 2003
-----------------------------------------------------------------------------------------------------
OPERATIONS:
Net investment income.............................................. $ 30,509,743 $ 35,687,878
Net realized gain.................................................. 34,385,677 22,134,421
Increase in net unrealized appreciation (depreciation)............. (50,325,694) 35,956,144
------------ ------------
INCREASE IN NET ASSETS FROM OPERATIONS............................. 14,569,726 93,778,443
------------ ------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income.............................................. (25,612,007) (39,505,644)
Net realized gains................................................. (14,267,894) --
------------ ------------
DECREASE IN NET ASSETS FROM DISTRIBUTIONS TO SHAREHOLDERS.......... (39,879,901) (39,505,644)
------------ ------------
FUND SHARE TRANSACTIONS:
Proceeds from shares issued in reinvestment of dividends
(163,699 and 266,970 shares issued, respectively)................ 2,448,643 3,083,557
------------ ------------
INCREASE IN NET ASSETS FROM FUND SHARE TRANSACTIONS................ 2,448,643 3,083,557
------------ ------------
INCREASE (DECREASE) IN NET ASSETS.................................... (22,861,532) 57,356,356
NET ASSETS:
Beginning of year.................................................. 334,575,666 277,219,310
------------ ------------
END OF YEAR*....................................................... $311,714,134 $334,575,666
============ ============
* Includes undistributed (overdistributed) net investment income of: $5,677,539 $(210,339)
========== =========
--------------------------------------------------------------------------------
SEE NOTES TO FINANCIAL STATEMENTS.
PAGE 11
SALOMON BROTHERS EMERGING MARKETS INCOME FUND II INC.
Statement of Cash Flows
For the Year Ended May 31, 2004
CASH FLOWS PROVIDED (USED) BY OPERATING AND INVESTING ACTIVITIES:
Interest received.................................................................. $ 32,110,836
Operating expenses paid............................................................ (3,937,280)
Net purchase of short-term investments............................................. (1,967,000)
Realized loss on foreign currency transactions..................................... (55,712)
Realized gain on options written................................................... 238,513
Realized loss on futures contracts................................................. (11,745,805)
Net change in unrealized appreciation on futures contracts......................... 12,157,628
Net change in unrealized appreciation on foreign currencies........................ 55,797
Net purchases of long-term investments............................................. (851,681,657)
Proceeds from disposition of long-term investments................................. 818,335,358
Net change in receivable from broker -- variation margin........................... (1,160,156)
Interest paid...................................................................... (2,398,938)
------------
NET CASH USED BY OPERATING AND INVESTING ACTIVITIES................................ (10,048,416)
------------
CASH FLOWS PROVIDED (USED) BY FINANCING ACTIVITIES:
Cash dividends paid on Common Stock................................................ (39,879,901)
Proceeds from reverse repurchase agreement......................................... 50,375,000
Proceeds from reinvestment of dividends............................................ 2,448,643
------------
NET CASH FLOWS PROVIDED BY FINANCING ACTIVITIES.................................... 12,943,742
------------
NET INCREASE IN CASH................................................................. 2,895,326
Cash, Beginning of year.............................................................. 29,964
------------
CASH, END OF YEAR.................................................................... $ 2,925,290
============
RECONCILIATION OF INCREASE IN NET ASSETS FROM OPERATIONS TO NET CASH FLOWS
PROVIDED (USED) BY OPERATING AND INVESTING ACTIVITIES:
INCREASE IN NET ASSETS FROM OPERATIONS............................................. $ 14,569,726
------------
Accretion of discount on investments............................................... (5,121,939)
Amortization of premium on investments............................................. 1,250,043
Increase in investments, at value.................................................. (75,161,475)
Increase in interest receivable.................................................... (1,106,803)
Decrease in receivable for investments sold........................................ 73,292,587
Increase in variation margin receivable............................................ (1,160,156)
Decrease in prepaid expenses....................................................... 11,536
Decrease in payable of investments purchased....................................... (16,853,973)
Increase in interest payable....................................................... 168,668
Increase in accrued expenses....................................................... 63,370
------------
TOTAL ADJUSTMENTS.................................................................. (24,618,142)
------------
NET CASH FLOWS USED BY OPERATING AND INVESTING ACTIVITIES............................ $(10,048,416)
============
--------------------------------------------------------------------------------
SEE NOTES TO FINANCIAL STATEMENTS.
PAGE 12
SALOMON BROTHERS EMERGING MARKETS INCOME FUND II INC.
Notes to Financial Statements
Note 1. Organization and Significant Accounting Policies
Salomon Brothers Emerging Markets Income Fund II Inc. ("Fund") was incorporated
in Maryland on April 27, 1993 and is registered as a non-diversified,
closed-end, management investment company under the Investment Company Act of
1940, as amended. The Board of Directors authorized 100 million shares of $0.001
par value common stock. The Fund's primary investment objective is to seek high
current income. As a secondary objective, the Fund seeks capital appreciation.
In pursuit of these objectives, the Fund under normal conditions invests at
least 80% of its net assets plus any borrowings for investment purposes in debt
securities of government and government related issuers located in emerging
market countries (including participations in loans between governments and
financial institutions), and of entities organized to restructure the
outstanding debt of such issuers, and in debt securities of corporate issuers
located in emerging market countries.
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. The
policies are in conformity with U.S. generally accepted accounting principles
("GAAP"). The preparation of financial statements in accordance with GAAP
requires management to make estimates and assumptions that affect the reported
amounts and disclosures in the financial statements. Actual results may differ
from those estimates.
(a) SECURITIES VALUATION. In valuing the Fund's assets, all securities and
derivatives for which market quotations are readily available are valued (i) at
the last sale price prior to the time of determination if there was a sale on
the date of determination, (ii) at the mean between the last current bid and
asked price if there was no sales price on such date and bid and asked
quotations are available, and (iii) at the bid price if there was no sales price
on such date and only bid quotations are available. Publicly traded foreign
government debt securities are typically traded internationally in the
over-the-counter market, and are valued at the mean between the last current bid
and asked price as of the close of business of that market. However, where the
spread between bid and asked price exceeds five percent of the par value of the
security, the security is valued at the bid price. Securities may also be valued
by independent pricing services which use prices provided by market-makers or
estimates of market values obtained from yield data relating to instruments or
securities with similar characteristics. Short-term investments having a
maturity of 60 days or less are valued at amortized cost, unless the Board of
Directors determines that such valuation does not constitute fair value.
Securities for which reliable quotations are not readily available and all other
securities and assets are valued at fair value as determined in good faith by,
or under procedures established by, the Board of Directors.
(b) INVESTMENT TRANSACTIONS AND INVESTMENT INCOME. Investment transactions are
recorded on the trade date. Interest income is accrued on a daily basis. Market
discount or premium on securities purchased is accreted or amortized,
respectively, on an effective yield basis over the life of the security. The
Fund uses the specific identification method for determining realized gain or
loss on investments sold.
PAGE 13
SALOMON BROTHERS EMERGING MARKETS INCOME FUND II INC.
Notes to Financial Statements (continued)
(c) FOREIGN CURRENCY TRANSLATION. The books and records of the Fund are
maintained in U.S. dollars. Portfolio securities and other assets and
liabilities denominated in foreign currencies are translated into U.S. dollar
amounts at the date of valuation. Purchases and sales of portfolio securities
and income and expense items denominated in foreign currencies are translated
into U.S. dollars at rates of exchange prevailing on the respective dates of
such transactions. Net realized gains and losses on foreign currency
transactions represent net gains and losses from sales and maturities of forward
currency contracts, disposition of foreign currencies, currency gains and losses
realized between the trade and settlement dates on securities transactions and
the difference between the amount of income accrued and the U.S. dollar
equivalent amount actually received. The Fund does not isolate that portion of
gains and losses on investments which is due to changes in foreign exchange
rates from that which is due to changes in market prices of the securities. Such
fluctuations are included with the net realized and unrealized gain or loss from
investments. However, pursuant to U.S. federal income tax regulations, certain
net foreign exchange gains/losses included in realized gain/loss are included in
or are a reduction of ordinary income for federal income tax purposes.
(d) FEDERAL INCOME TAXES. It is the Fund's intention to continue to meet the
provisions of the Internal Revenue Code applicable to regulated investment
companies and to distribute substantially all of its taxable income and capital
gains, if any, to its shareholders. Therefore, no federal income tax or excise
tax provision is required.
(e) REPURCHASE AGREEMENTS. When entering into repurchase agreements, it is the
Fund's policy that a custodian takes possession of the underlying collateral
securities, the value of which at least equals the principal amount of the
repurchase transaction, including accrued interest. To the extent that any
repurchase transaction exceeds one business day, the value of the collateral is
marked-to-market to ensure the adequacy of the collateral. If the seller
defaults and the value of the collateral declines or if bankruptcy proceedings
are commenced with respect to the seller of the security, realization of the
collateral by the Fund may be delayed or limited.
(f) DISTRIBUTION OF INCOME AND GAINS. The Fund declares and pays distributions
to shareholders quarterly. Net realized gains, if any, in excess of loss
carryovers are expected to be distributed, at least, annually. Dividends and
distributions to shareholders are recorded on the ex-dividend date. The amount
of dividends and distributions from net investment income and net realized gains
are determined in accordance with federal income tax regulations, which may
differ from GAAP due primarily to differences in the treatment of foreign
currency gains/losses and deferral of wash sales incurred by the Fund. These
"book/tax" differences are either considered temporary or permanent in nature.
To the extent these differences are permanent in nature, such amounts are
reclassified within the capital accounts based on their federal income tax basis
treatment; temporary differences do not require reclassification. Dividends and
distributions which exceed net investment income and net realized capital gains
for tax purposes, are reported as tax return of capital.
(g) FORWARD FOREIGN CURRENCY CONTRACTS. A forward foreign currency contract is a
commitment to purchase or sell a foreign currency at a future date at a
negotiated forward rate. The contract is marked to market to reflect the change
in the currency exchange rate. The change in market value is recorded by the
Fund as an unrealized gain or loss. The Fund records a realized gain or loss on
delivery of the currency or at the time the forward foreign currency contract is
extinguished
PAGE 14
SALOMON BROTHERS EMERGING MARKETS INCOME FUND II INC.
Notes to Financial Statements (continued)
(compensated) by entering into a closing transaction prior to delivery. This
gain or loss, if any, is included in net realized gain (loss) on foreign
currency transactions.
(h) CASH FLOW INFORMATION. The Fund invests in securities and distributes
dividends from net investment income and net realized gains from investment
transactions which are paid in cash. These activities are reported in the
Statement of Changes in Net Assets. Additional information on cash receipts and
cash payments is presented in the Statement of Cash Flows.
(i) YEAR END TAX RECLASSIFICATIONS. The character of income and gains to be
distributed is determined in accordance with income tax regulations which may
differ from GAAP. At May 31, 2004, reclassifications were made to the capital
accounts of the Fund to reflect permanent book/tax differences and income and
gains available for distributions under income tax regulations. Net investment
income, net realized gains and net assets were not affected by this change.
Note 2. Management and Advisory Fees and Other Transactions
The Fund entered into a new investment advisory and administration agreement
with Salomon Brothers Asset Management Inc ("SBAM"), an indirect wholly-owned
subsidiary of Citigroup Inc. ("Citigroup"). SBAM provides all management,
advisory and administration services for the Fund. SBAM has delegated certain
administrative services to Smith Barney Fund Management LLC ("SBFM"), another
indirect wholly-owned subsidiary of Citigroup and an affiliate of SBAM, pursuant
to a Sub-Administration Agreement between SBAM and SBFM.
The Fund currently pays SBAM a monthly fee at an annual rate of 1.05% of the
Fund's average weekly net assets for its services.
At May 31, 2004, Citigroup Global Markets Inc., another indirect wholly-owned
subsidiary of Citigroup, held 47 shares of the Fund.
Certain officers and/or directors of the Fund are officers and/or directors of
SBAM.
Note 3. Portfolio Activity
For the year ended May 31, 2004, the aggregate cost of purchases and proceeds
from sales of investments (including maturities of long-term investments, but
excluding short-term investments) were as follows:
Purchases ...................................................... $834,827,684
============
Sales .......................................................... $745,042,771
============
At May 31, 2004, the aggregate gross unrealized appreciation and depreciation of
investments for Federal income tax purposes were as follows:
Gross unrealized appreciation .................................. $ 1,958,631
Gross unrealized depreciation .................................. (29,878,730)
------------
Net unrealized depreciation .................................... $(27,920,099)
============
PAGE 15
SALOMON BROTHERS EMERGING MARKETS INCOME FUND II INC.
Notes to Financial Statements (continued)
Note 4. Loan
At May 31, 2004, the Fund had a $110,000,000 loan available pursuant to a
revolving credit and security agreement of which the Fund had $100,000,000
outstanding with CXC LLC, an affiliate of Citigroup, a commercial paper conduit
issuer for which Citicorp North America, Inc., an affiliate of SBAM, acts as
administrative agent. The loans generally bear interest at a variable rate based
on the weighted average interest rate of the underlying commercial paper or
LIBOR, plus any applicable margin. Securities held by the Fund are subject to a
lien, granted to the lenders, to the extent of the borrowing outstanding and any
additional expenses. For the year ended May 31, 2004, the annualized weighted
average interest rate of the loan was 2.19%. The Fund paid interest expense of
$2,224,346 on this loan.
Note 5. Loan Participations/Assignments
The Fund invests in fixed and floating rate loans arranged through private
negotiations between a foreign sovereign entity and one or more financial
institutions ("lenders"). The Fund's investment in any such loan may be in the
form of a participation in or an assignment of the loan. At May 31, 2004, the
Fund held loan participations with a total cost of $17,219,297 and with a total
market value of $17,654,820.
In connection with purchasing loan participations, the Fund generally will have
no right to enforce compliance by the borrower with the terms of the loan
agreement relating to the loan, nor any rights of set-off against the borrower,
and the Fund may not benefit directly from any collateral supporting the loan in
which it has purchased the participation. As a result, the Fund will assume the
credit risk of both the borrower and the lender that is selling the
participation. In the event of the insolvency of the lender selling the
participation, the Fund may be treated as a general creditor of the lender and
may not benefit from any set-off between the lender and the borrower.
When the Fund purchases assignments from lenders, the Fund will acquire direct
rights against the borrower on the loan, except that under certain circumstances
such rights may be more limited than those held by the assigning lender.
The Fund may have difficulty disposing of participations/assignments because the
market for certain instruments may not be highly liquid.
Note 6. Futures Contracts
Securities or cash equal to the initial margin amount are either deposited with
the broker or segregated by the custodian upon entering into the futures
contract. Additional securities are also segregated up to the current market
value of the futures contracts. During the period the futures contract is open,
changes in the value of the contract are recognized as unrealized gains or
losses by "marking to market" on a daily basis to reflect the market value of
the contract at the end of each day's trading. Variation margin payments are
received or made and recognized as assets due from or liabilities due to broker,
depending upon whether unrealized gains or losses are incurred. When the
PAGE 16
SALOMON BROTHERS EMERGING MARKETS INCOME FUND II INC.
Notes to Financial Statements (continued)
contract is closed, the Fund records a realized gain or loss equal to the
difference between the proceeds from (or cost of) the closing transactions and
the Fund's basis in the contract. The Fund enters into such contracts typically
to hedge a portion of its portfolio. The Fund bears the market risk that arises
from changes in the value of the financial instruments and securities indices.
At May 31, 2004, the Fund had the following open futures contracts:
Sold Number of Market Unrealized
Contracts Contracts Expiration Basis Value Value Gain
--------------- --------- ---------- ----------- ------- ---------
U.S. Treasury
10 Year Note 2,250 6/04 $259,376,378 $247,218,750 $12,157,628
Note 7. Reverse Repurchase Agreements
The Fund may enter into reverse repurchase agreements in which a Fund sells
portfolio securities and agrees to repurchase them from the buyer at a
particular date and price. Whenever a Fund enters into a reverse repurchase
agreement, the custodian delivers liquid assets in an amount at least equal to
the repurchase price marked-to-market daily (including accrued interest), and
subsequently monitors the account to ensure that equivalent value is maintained.
A Fund pays interest on amounts obtained pursuant to reverse repurchase
agreements. Reverse repurchase agreements are considered to be borrowings by a
Fund. Reverse repurchase agreements involve leverage risk and the risk that the
market value of securities retained by the Fund may decline below the repurchase
price of the securities sold by the Fund which it is obligated to repurchase.
Transactions in reverse repurchase agreements for the Fund during the year ended
May 31, 2004 were as follows:
Average Weighted Maximum
Daily Average Amount
Fund Balance Interest Rate Outstanding
------ ------------- ------------ -------------
Emerging Markets Income Fund II ............ $19,395,150 1.34% $50,375,000
Interest rates on reverse repurchase agreements ranged from 1.10% to 1.40%
during the year ended May 31, 2004. Interest expense paid on reverse repurchase
agreements totaled $174,592.
At May 31, 2004, the Fund had the following open reverse repurchase agreement:
FACE
AMOUNT SECURITY VALUE
------------ --------------------------------------------------------------- ------------
$50,375,000 Reverse Repurchase Agreement with J.P. Morgan Chase & Co.,
dated 2/19/04 bearing 1.400% to be repurchased at $51,090,045
on 2/18/05, collateralized by: Russian Federation, 5.000% due
3/31/30; Market value -- $52,043,531 (Cost -- $50,375,000)....... $50,375,000
Note 8. Credit and Market Risk
The yields of emerging market debt obligations reflect, among other things,
perceived credit risk. The Fund's investment in securities rated below
investment grade typically involves risks not
PAGE 17
SALOMON BROTHERS EMERGING MARKETS INCOME FUND II INC.
Notes to Financial Statements (continued)
associated with higher rated securities including, among others, overall greater
risk of timely and ultimate payment of interest and principal, greater market
price volatility and less liquid secondary market trading. The consequences of
political, social, economic or diplomatic changes may have disruptive effects on
the market prices of investments held by the Fund. The Fund's investment in
non-dollar-denominated securities may also result in foreign currency losses
caused by devaluations and exchange rate fluctuations. At May 31, 2004, the Fund
had a concentration of risk in sovereign debt of emerging market countries.
Note 9. Option Contracts
The Fund may from time to time enter into option contracts. Premiums paid when
put or call options are purchased by the Fund, represent investments, which are
marked-to-market daily. When a purchased option expires, the Fund will realize a
loss in the amount of the premium paid. When the Fund enters into a closing
sales transaction, the Fund will realize a gain or loss depending on whether the
proceeds from the closing sales transaction are greater or less than the premium
paid for the option. When the Fund exercises a put option, it will realize a
gain or loss from the sale of the underlying security and the proceeds from such
sale will be decreased by the premium originally paid. When the Fund exercises a
call option, the cost of the security which the Fund purchases upon exercise
will be increased by the premium originally paid.
At May 31, 2004, the Fund did not hold any purchased call or put option
contracts.
When the Fund writes a call or put option, an amount equal to the premium
received by the Fund is recorded as a liability, the value of which is
marked-to-market daily. When a written option expires, the Fund realizes a gain
equal to the amount of the premium received.
When the Fund enters into a closing purchase transaction, the Fund realizes a
gain or loss depending upon whether the cost of the closing transaction is
greater or less than the premium originally received, without regard to any
unrealized gain or loss on the underlying security, and the liability related to
such option is eliminated. When a written call option is exercised, the proceeds
of the security sold will be increased by the premium originally received. When
a written put option is exercised, the amount of the premium originally received
will reduce the cost of the security which the Fund purchased upon exercise.
When written index options are exercised, settlement is made in cash.
The Fund enters into options for hedging purposes. The risk associated with
purchasing options is limited to the premium originally paid. The risk in
writing a covered call option is that the Fund gives up the opportunity to
participate in any increase in the price of the underlying security beyond the
exercise price. The risk in writing a put option is that the Fund is exposed to
the risk of loss if the market price of the underlying security declines. The
risk in writing a call option is that the Fund is exposed to the risk of loss if
the market price of the underlying security increases.
PAGE 18
SALOMON BROTHERS EMERGING MARKETS INCOME FUND II INC.
Notes to Financial Statements (continued)
The following written covered call option transactions occurred during the year
ended May 31, 2004:
Number of
Contracts PREMIUMS
--------- ---------
Options written, outstanding at May 31, 2003........ -- $ 0
Options written..................................... 40,785 243,513
Options closed...................................... (10,000) (145,000)
Options expired..................................... (30,785) (98,513)
------- ---------
Options written, outstanding at May 31, 2004........ -- $ 0
======= =========
Note 10. Dividend Subsequent to May 31, 2004
On May 14, 2004, the Board of Directors of the Fund declared a dividend of
$0.4125 per share from net investment income. The dividend is payable on June
25, 2004 to shareholders of record on June 15, 2004.
Note 11. Income Tax Information and Distributions to Shareholders
The tax basis components of distributable earnings at May 31, 2004 was:
2004
------------
Undistributed ordinary income ........................ $ 11,707,672
============
Unrealized depreciation .............................. $(27,920,099)
============
The difference between book basis and tax basis unrealized appreciation and
depreciation is attributable primarily to wash sales loss deferrals,
mark-to-market of derivative contracts and the treatment of amortization of
premiums and accretion of discounts.
The tax character of distributions paid during the year ended May 31 was:
2004 2003
----------- -----------
Ordinary income............................ $39,879,901 $39,505,644
=========== ===========
Note 12. Additional Information
Citigroup has been notified by the Staff of the Securities and Exchange
Commission ("SEC") that the Staff is considering recommending a civil injunctive
action and/or an administrative proceeding against Citigroup Asset Management
("CAM"), including its applicable investment advisory companies and Citicorp
Trust Bank ("CTB"), an internal transfer agent, relating to the creation and
operation of the internal transfer agent unit to serve certain CAM-managed
funds. CTB did not provide services to the Fund. This notification arises out of
a previously disclosed investigation by the SEC and the U.S. Attorney and
relates to CTB's entry in 1999 into the transfer agency business, CAM's
retention of, and
PAGE 19
SALOMON BROTHERS EMERGING MARKETS INCOME FUND II INC.
Notes to Financial Statements (continued)
agreements with an unaffiliated sub-transfer agent, the adequacy of the
disclosures made to the fund boards that approved the transfer agency
arrangements, (including CAM's failure to disclose a related revenue guarantee
agreement benefiting CAM and its affiliates), and CAM's operation of and
compensation for the transfer agency business. The revenue guarantee described
above was terminated in 1999 and CAM will be paying the applicable funds,
primarily through fee waivers, a total of approximately $17 million (plus
interest) that is the amount of the revenue received by Citigroup relating to
the revenue guarantee. Citigroup is cooperating fully in the investigation and
will seek to resolve the matter in discussions with the SEC Staff. Although
there can be no assurance, Citigroup does not believe that this matter will have
a material adverse effect on the Fund.
PAGE 20
SALOMON BROTHERS EMERGING MARKETS INCOME FUND II INC.
Financial Highlights
Data for a share of common stock outstanding throughout the year ended May 31,
unless otherwise noted:
2004(1) 2003(1) 2002 2001 2000
------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF YEAR............. $13.88 $11.63 $11.53 $10.84 $ 9.71
------ ------ ------ ------ ------
INCOME (LOSS) FROM OPERATIONS:
Net investment income(2).................... 1.26 1.49 1.37 1.80 1.36
Net realized and unrealized gain (loss)(2).. (0.65) 2.40 0.37 0.54 1.41
------ ------ ------ ------ ------
Total Income From Operations................... 0.61 3.89 1.74 2.34 2.77
------ ------ ------ ------ ------
LESS DISTRIBUTIONS FROM:
Net investment income....................... (1.06) (1.65) (1.65) (1.65) (1.65)
Net realized gains.......................... (0.59) -- -- -- --
------ ------ ------ ------ ------
Total Distributions............................ (1.65) (1.65) (1.65) (1.65) (1.65)
------ ------ ------ ------ ------
INCREASE IN NET ASSET VALUE DUE TO SHARES
ISSUED ON REINVESTMENT OF DIVIDENDS.......... -- 0.01 0.01 -- 0.01
------ ------ ------ ------ --------
NET ASSET VALUE, END OF YEAR................... $12.84 $13.88 $11.63 $11.53 $10.84
====== ====== ====== ====== ========
MARKET VALUE, END OF YEAR...................... $14.40 $15.53 $13.88 $12.65 $10.8125
====== ====== ====== ====== ========
TOTAL RETURN, BASED ON MARKET
PRICE PER SHARE(3).......................... 3.38% 28.76% 26.23% 35.06% 5.83%
RATIOS TO AVERAGE NET ASSETS:
Total expenses, including interest expense.. 1.98% 2.37% 3.06% 4.55% 4.45%
Total expenses, excluding interest
expense (operating expenses).............. 1.21% 1.37% 1.40% 1.37% 1.39%
Net investment income(2).................... 9.19% 13.59% 13.60% 15.41% 13.52%
SUPPLEMENTAL DATA:
Net Assets, End of Year (000s).............. $311,714 $334,576 $277,219 $271,898 $254,060
Portfolio Turnover Rate .................... 169% 237% 233% 225% 93%
Loan Outstanding, End of Year (000s)........ $100,000 $100,000 $100,000 $100,000 $100,000
Asset Coverage (000s)....................... $411,714 $434,576 $377,219 $371,898 $354,060
Asset Coverage for Loan Outstanding ........ 412% 435% 377% 372% 354%
Weighted Average Loan (000s)................ $100,000 $100,000 $100,000 $100,000 $100,000
Weighted Average Interest Rate on Loans..... 2.19% 2.60% 4.40% 8.55% 7.55%
------------------------------------------------------------------------------------------------------
(1) Per share amounts have been calculated using the monthly average shares
method.
(2) Effective June 1, 2001, the Fund adopted a change in the accounting method
that requires the Fund to amortize premiums and accrete all discounts.
Without the adoption of this change for the year ended May 31, 2002, the
ratio of net investment income to average net assets would have been 13.65%.
In addition, the impact of this change to net investment income and net
realized and unrealized gain per share was less than $0.01. Per share
information, ratios and supplemental data for the periods prior to June 1,
2001 have not been restated to reflect this change in presentation.
(3) For the purposes of this calculation, dividends are assumed to be reinvested
at prices obtained under the Fund's dividend reinvestment plan and the
broker commission paid to purchase or sell a share is excluded.
PAGE 21
SALOMON BROTHERS EMERGING MARKETS INCOME FUND II INC.
Report of Independent Registered Public Accounting Firm
TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF
SALOMON BROTHERS EMERGING MARKETS INCOME FUND II INC.
In our opinion, the accompanying statement of assets and liabilities, including
the schedule of investments, and the related statements of operations, of
changes in net assets and of cash flows and the financial highlights present
fairly, in all material respects, the financial position of Salomon Brothers
Emerging Markets Income Fund II Inc. ("Fund") at May 31, 2004, the results of
its operations and cash flows for the year then ended, the changes in its net
assets for each of the two years in the period then ended and the financial
highlights for each of the five years in the period then ended, in conformity
with accounting principles generally accepted in the United States of America.
These financial statements and financial highlights (hereafter referred to as
"financial statements") are the responsibility of the Fund's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these financial statements in accordance
with the standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits, which included confirmation of securities at May 31, 2004 by
correspondence with the custodian and brokers, provide a reasonable basis for
our opinion.
PricewaterhouseCoopers LLP
New York, New York 10036
July 21, 2004
PAGE 22
SALOMON BROTHERS EMERGING MARKETS INCOME FUND II INC.
Additional Information (unaudited)
INFORMATION ABOUT DIRECTORS AND OFFICERS
The business and affairs of Salomon Brothers Emerging Markets Income Fund II
Inc. ("Fund") are managed under the direction of the Board of Directors.
Information pertaining to the Directors and Officers of the Fund is set forth
below.
NUMBER OF
PORTFOLIOS IN
FUND COMPLEX
TERM OF PRINCIPAL OVERSEEN BY OTHER
POSITION(S) OFFICE(1) AND OCCUPATION(S) DIRECTOR BOARD
HELD WITH LENGTH OF DURING PAST (INCLUDING MEMBERSHIPS
NAME, ADDRESS AND AGE FUND(1) TIME SERVED FIVE YEARS THE FUND) HELD BY DIRECTOR
----------------------------------------------------------------------------------------------------------
NON-INTERESTED DIRECTORS:
Carol L. Colman Director and Since President, 35 None
Colman Consulting Co. Member of the 2003 Colman
278 Hawley Road Nominating and Consulting Co.
North Salem, NY 10560 Audit Committees,
Age 58 Class III
Daniel P. Cronin Director and Since Formerly Associate 32 None
Pfizer Inc. Member of the 2003 General Counsel,
235 East 42nd Street Nominating and Pfizer Inc.
New York, NY 10017 Audit Committees,
Age 57 Class III
Leslie H. Gelb Director and Since President, Emeritus and 32 Director of
150 East 69th Street Member of 1994 Senior Board Fellow, two registered
New York, NY 10021 the Nominating The Council on Foreign investment
Age 66 and Audit Relations; Formerly, companies
Committees, Columnist, Deputy advised by
Class I Editorial Page Editor and Advantage
Editor, Op-Ed Page, Advisers, Inc.
The New York Times ("Advantage")
William R. Hutchinson Director and Since President, W.R. 42 Director,
535 N. Michigan Member of 2003 Hutchinson & Associates Associated
Suite 1012 Nominating Inc.; Formerly Group Vice Banc-Corp.
Chicago, IL 60611 and Audit President, Mergers and
Age 61 Committees, Acquisitions, BP Amoco
Class III p.l.c.
Riordan Roett Director and Since Professor and Director, 32 Director,
The Johns Hopkins University Member of 1995 Latin America Studies The Latin
1740 Massachusetts Ave., NW the Nominating Program, Paul H. Nitze America Equity
Washington, DC 20036 and Audit School of Advanced Fund, Inc.
Age 65 Committees, International Studies,
Class I The Johns Hopkins
University
PAGE 23
SALOMON BROTHERS EMERGING MARKETS INCOME FUND II INC.
Additional Information (unaudited) (continued)
NUMBER OF
PORTFOLIOS IN
FUND COMPLEX
TERM OF PRINCIPAL OVERSEEN BY OTHER
POSITION(S) OFFICE(1) AND OCCUPATION(S) DIRECTOR BOARD
HELD WITH LENGTH OF DURING PAST (INCLUDING MEMBERSHIPS
NAME, ADDRESS AND AGE FUND(1) TIME SERVED FIVE YEARS THE FUND) HELD BY DIRECTOR
----------------------------------------------------------------------------------------------------------
Jeswald W. Salacuse Director and Since Henry J. Braker 32 Director of two
Tufts University Member of 1994 Professor of registered
The Fletcher School of the Nominating Commercial Law and investment
Law & Diplomacy and Audit formerly Dean, The companies
160 Packard Avenue Committees, Fletcher School of advised by
Medford, MA 02155 Class II Law & Diplomacy, Advantage
Age 66 Tufts University
INTERESTED DIRECTOR:
R. Jay Gerken, CFA(2) Director, Since Managing Director 221 None
Citigroup Asset Chairman 2002 of Citigroup Global
Management ("CAM") and Chief Markets Inc. ("CGM");
399 Park Avenue, 4th Floor Executive Officer, Chairman, President,
New York, NY 10022 Class II Chief Executive Officer
Age 53 and Director of
Smith Barney Fund
Management LLC
("SBFM"), Travelers
Investment Adviser, Inc.
("TIA") and Citi Fund
Management Inc.
("CFM"); President and
Chief Executive Officer
of certain mutual funds
associated with Citigroup
Inc. ("Citigroup");
Formerly Portfolio
Manager of Smith Barney
Allocation Series Inc. (from
1996 to 2001) and Smith
Barney Growth and
Income Fund (from 1996
to 2000)
PAGE 24
SALOMON BROTHERS EMERGING MARKETS INCOME FUND II INC.
Additional Information (unaudited) (continued)
NUMBER OF
PORTFOLIOS IN
FUND COMPLEX
TERM OF PRINCIPAL OVERSEEN BY OTHER
POSITION(S) OFFICE(1) AND OCCUPATION(S) DIRECTOR BOARD
HELD WITH LENGTH OF DURING PAST (INCLUDING MEMBERSHIPS
NAME, ADDRESS AND AGE FUND(1) TIME SERVED FIVE YEARS THE FUND) HELD BY DIRECTOR
----------------------------------------------------------------------------------------------------------
OFFICERS:
Peter J. Wilby, CFA President Since Managing Director N/A N/A
CAM 1994 of CGM and Salomon
399 Park Avenue, 4th Floor Brothers Asset
New York, NY 10022 Management Inc
Age 44 ("SBAM") (since
January 1996)
Andrew B. Shoup Senior Vice Since Director of CAM; N/A N/A
CAM President and 2003 Senior Vice President
125 Broad Street, 11th Floor Chief and Chief Administrative
New York, NY 10004 Administrative Officer of mutual funds
Age 47 Officer associated with Citigroup;
Treasurer of certain
mutual funds associated
with Citigroup; Head of
International Funds
Administration of CAM
(from 2001 to 2003);
Director of Global
Funds Administration of
CAM (from 2000 to
2001); Head of U.S.
Citibank Funds
Administration of CAM
(from 1998 to 2000)
Frances M. Guggino Treasurer and Since Vice President of CGM; N/A N/A
CAM Chief Financial 2004 Treasurer and Chief
125 Broad Street, 10th Floor Officer Financial Officer of
New York, NY 10004 certain mutual funds
Age 45 Controller Since associated with Citigroup;
2002 Controller of certain
mutual funds associated
with Citigroup
James E. Craige, CFA Executive Vice Since Managing Director of N/A N/A
CAM President 1999 CGM and SBAM
399 Park Avenue, 4th Floor (since December 1998);
New York, NY 10022 Director of CGM and
Age 37 SBAM (since January
1998) and Vice
President of CGM and
SBAM (since January
1996)
PAGE 25
SALOMON BROTHERS EMERGING MARKETS INCOME FUND II INC.
Additional Information (unaudited) (continued)
NUMBER OF
PORTFOLIOS IN
FUND COMPLEX
TERM OF PRINCIPAL OVERSEEN BY OTHER
POSITION(S) OFFICE(1) AND OCCUPATION(S) DIRECTOR BOARD
HELD WITH LENGTH OF DURING PAST (INCLUDING MEMBERSHIPS
NAME, ADDRESS AND AGE FUND(1) TIME SERVED FIVE YEARS THE FUND) HELD BY DIRECTOR
----------------------------------------------------------------------------------------------------------
Thomas K. Flanagan, CFA Executive Vice Since Managing Director N/A N/A
CAM President 1994 of CGM and SBAM
399 Park Avenue, 4th Floor (since December 1998);
New York, NY 10022 Prior to December
Age 50 1998, Director of
CGM and SBAM
Joseph T. Volpe Controller Since Vice President of CAM N/A N/A
CAM 2004 (since 1992); Assistant
125 Broad Street, 10th Floor Controller for CAM
New York, NY 10004 (since 2002); Controller
Age 42 of certain mutual funds
associated with Citigroup
Robert I. Frenkel Secretary and Since Managing Director and N/A N/A
CAM Chief Legal 2003 General Counsel of
300 First Stamford Place Officer Global Mutual Funds
4th Floor for CAM and its
Stamford, CT 06902 predecessor (since
Age 48 1994); Secretary of CFM
(from 2001 to 2004);
Secretary and Chief Legal
Officer of mutual funds
associated with Citigroup
------------
(1) The Fund's Board of Directors is divided into three classes: Class I, Class
II and Class III. The terms of office of the Class I, II and III Directors
expire at the Annual Meetings of Stockholders in the year 2004, year 2005
and year 2006, respectively, or thereafter in each case when their
respective successors are duly elected and qualified. The Fund's executive
officers are chosen each year at the first meeting of the Fund's Board of
Directors following the Annual Meeting of Stockholders, to hold office until
the meeting of the Board following the next Annual Meeting of Stockholders
and until their successors are duly elected and qualified.
2) Mr. Gerken is an "interested person" of the Fund as defined in the
Investment Company Act of 1940, as amended, because Mr. Gerken is an officer
of SBFM and certain of its affiliates.
PAGE 26
SALOMON BROTHERS EMERGING MARKETS INCOME FUND II INC.
Form of Terms and Conditions of Amended and Restated Dividend Reinvestment and
Cash Purchase Plan (unaudited)
Pursuant to certain rules of the Securities and Exchange Commission, the
following additional disclosure is provided.
Each shareholder holding shares of common stock ("Shares") of the Salomon
Brothers Emerging Markets Income Fund II Inc., will be deemed to have elected to
be a participant in the Amended and Restated Dividend Reinvestment and Cash
Purchase Plan ("Plan"), unless the shareholder specifically elects in writing
(addressed to the Agent at the address below or to any nominee who holds Shares
for the shareholder in its name) to receive all income dividends and
distributions of capital gains in cash, paid by check, mailed directly to the
record holder by or under the direction of American Stock Transfer & Trust
Company as the Fund's dividend-paying agent ("Agent"). A shareholder whose
Shares are held in the name of a broker or nominee who does not provide an
automatic reinvestment service may be required to take such Shares out of
"street name" and register such Shares in the shareholder's name in order to
participate, otherwise dividends and distributions will be paid in cash to such
shareholder by the broker or nominee. Each participant in the Plan is referred
to herein as a "Participant." The Agent will act as Agent for each Participant,
and will open accounts for each Participant under the Plan in the same name as
their Shares are registered.
Unless the Fund declares a dividend or distribution payable only in the form of
cash, the Agent will apply all dividends and distributions in the manner set
forth below.
If, on the determination date, the market price per Share equals or exceeds the
net asset value per Share on that date (such condition, a "market premium"), the
Agent will receive the dividend or distribution in newly issued Shares of the
Fund on behalf of Participants. If, on the determination date, the net asset
value per Share exceeds the market price per Share (such condition, a "market
discount"), the Agent will purchase Shares in the open-market. The determination
date will be the fourth New York Stock Exchange trading day (a New York Stock
Exchange trading day being referred to herein as a "Trading Day") preceding the
payment date for the dividend or distribution. For purposes herein, "market
price" will mean the average of the highest and lowest prices at which the
Shares sell on the New York Stock Exchange on the particular date, or if there
is no sale on that date, the average of the closing bid and asked quotations.
Purchases made by the Agent will be made as soon as practicable commencing on
the Trading Day following the determination date and terminating no later than
30 days after the dividend or distribution payment date except where temporary
curtailment or suspension of purchase is necessary to comply with applicable
provisions of federal securities law; provided, however, that such purchases
will, in any event, terminate on the earlier of (i) 60 days after the dividend
or distribution payment date and (ii) the Trading Day prior to the "ex-dividend"
date next succeeding the dividend or distribution payment date.
PAGE 27
SALOMON BROTHERS EMERGING MARKETS INCOME FUND II INC.
Form of Terms and Conditions of Amended and Restated Dividend Reinvestment and
Cash Purchase Plan (unaudited) (continued)
If (i) the Agent has not invested the full dividend amount in open-market
purchases by the date specified in paragraph 4 above as the date on which such
purchases must terminate or (ii) a market discount shifts to a market premium
during the purchase period, then the Agent will cease making open-market
purchases and will receive the uninvested portion of the dividend amount in
newly issued Shares (x) in the case of (i) above, at the close of business on
the date the Agent is required to terminate making open-market purchases as
specified in paragraph 4 above or (y) in the case of (ii) above, at the close of
business on the date such shift occurs; but in no event prior to the payment
date for the dividend or distribution.
In the event that all or part of a dividend or distribution amount is to be paid
in newly issued Shares, such Shares will be issued to Participants in accordance
with the following formula: (i) if, on the valuation date, the net asset value
per Share is less than or equal to the market price per Share, then the newly
issued Shares will be valued at net asset value per Share on the valuation date;
provided, however, that if the net asset value is less than 95% of the market
price on the valuation date, then such Shares will be issued at 95% of the
market price and (ii) if, on the valuation date, the net asset value per Share
is greater than the market price per Share, then the newly issued Shares will be
issued at the market price on the valuation date. The valuation date will be the
dividend or distribution payment date, except that with respect to Shares issued
pursuant to paragraph 5 above, the valuation date will be the date such Shares
are issued. If a date that would otherwise be a valuation date is not a Trading
Day, the valuation date will be the next preceding Trading Day.
Participants have the option of making additional cash payments to the Agent,
monthly, in a minimum amount of $250, for investment in Shares. The Agent will
use all such funds received from Participants to purchase Shares in the open
market on or about the first business day of each month. To avoid unnecessary
cash accumulations, and also to allow ample time for receipt and processing by
the Agent, Participants should send in voluntary cash payments to be received by
the Agent approximately 10 days before an applicable purchase date specified
above. A Participant may withdraw a voluntary cash payment by written notice, if
the notice is received by the Agent not less than 48 hours before such payment
is to be invested.
Purchases by the Agent pursuant to paragraphs 4 and 7 above may be made on any
securities exchange on which the Shares are traded, in the over-the-counter
market or in negotiated transactions, and may be on such terms as to price,
delivery and otherwise as the Agent shall determine. Funds held by the Agent
uninvested will not bear interest, and it is understood that, in any event, the
Agent shall have no liability in connection with any inability to purchase
Shares within the time periods herein provided, or with the timing of any
purchases effected. The Agent shall have no responsibility as to the value of
the Shares acquired for the Participant's account. The Agent may
PAGE 28
SALOMON BROTHERS EMERGING MARKETS INCOME FUND II INC.
Form of Terms and Conditions of Amended and Restated Dividend Reinvestment and
Cash Purchase Plan (unaudited) (continued)
commingle amounts of all Participants to be used for open-market purchases of
Shares and the price per Share allocable to each Participant in connection with
such purchases shall be the average price (including brokerage commissions) of
all Shares purchased by the Agent.
The Agent will maintain all Participants' accounts in the Plan and will furnish
written confirmations of all transactions in each account, including information
needed by Participants for personal and tax records. The Agent will hold Shares
acquired pursuant to the Plan in noncertificated form in the Participant's name
or that of its nominee, and each Participant's proxy will include those Shares
purchased pursuant to the Plan. The Agent will forward to Participants any proxy
solicitation material and will vote any Shares so held for Participants only in
accordance with the proxy returned by Participants to the Fund. Upon written
request, the Agent will deliver to Participants, without charge, a certificate
or certificates for the full Shares.
The Agent will confirm to Participants each acquisition made for their
respective accounts as soon as practicable but not later than 60 days after the
date thereof. Although Participants may from time to time have an undivided
fractional interest (computed to three decimal places) in a Share of the Fund,
no certificates for fractional shares will be issued. Dividends and
distributions on fractional shares will be credited to each Participant's
account. In the event of termination of a Participant's account under the Plan,
the Agent will adjust for any such undivided fractional interest in cash at the
market value of the Fund's Shares at the time of termination less the pro rata
expense of any sale required to make such an adjustment.
Any share dividends or split shares distributed by the Fund on Shares held by
the Agent for Participants will be credited to their respective accounts. In the
event that the Fund makes available to Participants rights to purchase
additional Shares or other securities, the Shares held for Participants under
the Plan will be added to other Shares held by the Participants in calculating
the number of rights to be issued to Participants.
The Agent's service fee for handling capital gains distributions or income
dividends will be paid by the Fund. Participants will be charged a pro rata
share of brokerage commissions on all open-market purchases.
Participants may terminate their accounts under the Plan by notifying the Agent
in writing. Such termination will be effective immediately if notice is received
by the Agent not less than 10 days prior to any dividend or distribution record
date; otherwise such termination will be effective on the first Trading Day
after the payment date for such dividend or distribution with respect to any
subsequent dividend or distribution. The Plan may be amended or terminated by
the Fund as applied to any voluntary cash payments made and any income dividend
or capital gains distribution paid subsequent to written notice of the change or
termination sent to Participants at least 30 days prior to the record date for
the income dividend or capital gains distribution. The Plan may be
PAGE 29
SALOMON BROTHERS EMERGING MARKETS INCOME FUND II INC.
Form of Terms and Conditions of Amended and Restated Dividend Reinvestment and
Cash Purchase Plan (unaudited) (continued)
amended or terminated by the Agent, with the Fund's prior written consent, on at
least 30 days' written notice to Participants. Notwithstanding the preceding two
sentences, the Agent or the Fund may amend or supplement the Plan at any time or
times when necessary or appropriate to comply with applicable law or rules or
policies of the Securities and Exchange Commission or any other regulatory
authority. Upon any termination, the Agent will cause a certificate or
certificates for the full Shares held by each Participant under the Plan and
cash adjustment for any fraction to be delivered to each Participant without
charge.
Any amendment or supplement shall be deemed to be accepted by each Participant
unless, prior to the effective date thereof, the Agent receives written notice
of the termination of the Participant's account under the Plan. Any such
amendment may include an appointment by the Agent in its place and stead of a
successor Agent under these terms and conditions, with full power and authority
to perform all or any of the acts to be performed by the Agent under these terms
and conditions. Upon any such appointment of an Agent for the purpose of
receiving dividends and distributions, the Fund will be authorized to pay to
such successor Agent, for each Participant's account, all dividends and
distributions payable on Shares of the Fund held in each Participant's name or
under the Plan for retention or application by such successor Agent as provided
in these terms and conditions.
In the case of Participants, such as banks, broker-dealers or other nominees,
which hold Shares for others who are beneficial owners ("Nominee Holders"), the
Agent will administer the Plan on the basis of the number of Shares certified
from time to time by each Nominee Holder as representing the total amount
registered in the Nominee Holder's name and held for the account of beneficial
owners who are to participate in the Plan.
The Agent shall at all times act in good faith and use its best efforts within
reasonable limits to insure the accuracy of all services performed under this
Agreement and to comply with applicable law, but assumes no responsibility and
shall not be liable for loss or damage due to errors unless such error is caused
by its negligence, bad faith, or willful misconduct or that of its employees.
All correspondence concerning the Plan should be directed to the Agent at 59
Maiden Lane, New York, New York 10038.
--------------------------------
Notice is hereby given in accordance with Section 23(c) of the Investment
Company Act of 1940 that the Fund may purchase at market prices from time to
time shares of its common stock in the open market.
A description of the policies and procedures that the Fund uses to determine how
to vote proxies relating to portfolio securities is available without charge,
upon request, by telephoning the Fund (toll-free) at 1-800-446-1013 and by
visiting the SEC's web site at www.sec.gov.
The report is transmitted to the shareholders of the Fund for their information.
This is not a prospectus, circular or representation intended for use in the
purchase of shares of the Fund or any securities mentioned in this report.
PAGE 30
SALOMON BROTHERS EMERGING MARKETS INCOME FUND II INC.
Directors Salomon Brothers Emerging Markets
Income Fund II Inc.
CAROL L. COLMAN 125 Broad Street
DANIEL P. CRONIN 10th Floor, MF-2
LESLIE H. GELB New York, New York 10004
R. JAY GERKEN, CFA Telephone 1-888-777-0102
WILLIAM R. HUTCHINSON
RIORDAN ROETT INVESTMENT MANAGER
JESWALD W. SALACUSE Salomon Brothers Asset Management Inc
399 Park Avenue
New York, New York 10022
Officers
CUSTODIAN
R. JAY GERKEN, CFA State Street Bank and Trust Company
Chairman and Chief Executive Officer 225 Franklin Street
Boston, Massachusetts 02110
PETER J. WILBY, CFA
President TRANSFER AGENT
American Stock Transfer & Trust Company
ANDREW B. SHOUP 59 Maiden Lane
Senior Vice President and New York, New York 10038
Chief Administrative Officer
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
FRANCES M. GUGGINO PricewaterhouseCoopers LLP
Treasurer and Chief Financial Officer 1177 Avenue of the Americas
New York, New York 10036
JAMES E. CRAIGE, CFA
Executive Vice President LEGAL COUNSEL
Simpson Thacher & Bartlett LLP
THOMAS K. FLANAGAN, CFA 425 Lexington Avenue
Executive Vice President New York, New York 10017-3909
JOSEPH T. VOLPE NEW YORK STOCK EXCHANGE SYMBOL
Controller EDF
ROBERT I. FRENKEL
Secretary and Chief Legal Officer
PAGE 31
Salomon Brothers
Emerging Markets
Income Fund II Inc.
Annual Report
May 31, 2004
American Stock Transfer & Trust Company
59 Maiden Lane
New York, New York 10038
Salomon
Brothers
Asset Management
EDFANN 5/04
04-6914
ITEM 2. CODE OF ETHICS.
The registrant has adopted a code of ethics that applies to
the registrant's principal executive officer, principal
financial officer, principal accounting officer or controller.
ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT.
The Board of Directors of the registrant has determined that
William R. Hutchinson, the Chairman of the Board's Audit
Committee, possesses the technical attributes identified in
Instruction 2(b) of Item 3 to Form N-CSR to qualify as an
"audit committee financial expert," and has designated
Mr.Hutchinson as the Audit Committee's financial expert.
Mr.Hutchinson is an "independent" Director pursuant to
paragraph (a)(2) of Item 3 to Form N-CSR.
ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
(a) Audit Fees for Salomon Brothers Emerging Markets Income
Fund II Inc. were $53,000 and $53,000 for the years ended
5/31/04 and 5/31/03, respectively.
(b) Audit-Related Fees for Salomon Brothers Emerging Markets
Income Fund II Inc. were $8,500 and $8,500 for the years
ended 5/31/04 and 5/31/03. These amounts represent
procedures performed and prepared for agreed upon
procedures letter in accordance with the terms of the
Revolving Credit Facility.
In addition, there were no Audit-Related Fees billed in
the years ended 5/31/04 and 5/31/03 for assurance and
related services by the Accountant to the Registrant's
investment adviser (not including any sub-adviser whose
role is primarily portfolio management and is
subcontracted with or overseen by another investment
adviser), and any entity controlling, controlled by or
under common control with the investment adviser that
provides ongoing services to the Salomon Brothers
Emerging Markets Income Fund II Inc. ("service
affiliates"), that were reasonably related to the
performance of the annual audit of the service
affiliates. Accordingly, there were no such fees that
required pre-approval by the Audit Committee for the
period May 6, 2003 to May 31, 2004 (prior to May 6, 2003
services provided by the Accountant were not required to
be pre-approved).
(c) Tax Fees for Salomon Brothers Emerging Markets Income
Fund II Inc. were $6,200 and $6,200 for the years ended
5/31/04 and 5/31/03. These amounts represent aggregate
fees paid for tax compliance and tax advice, which
includes (the filing and amendment of federal, state and
local income tax returns, timely RIC qualification review
and tax distribution and analysis planning) rendered by
the Accountant to Salomon Brothers Emerging Markets
Income Fund II Inc.
There were no fees billed for tax services by the
Accountants to service affiliates for the period May 6,
2003 through May 31, 2004 that required pre-approval by
the Audit Committee.
(d) There were no All Other Fees for Salomon Brothers
Emerging Markets Income Fund II Inc. for the years ended
5/31/04 and 5/31/03.
ALL OTHER FEES: The aggregate fees billed for all other
non-audit services rendered by the Accountant to Salomon
Brothers Asset Management ("SBAM"), and any entity
controlling, controlled by or under common control with
SBAM that provided ongoing services to Salomon Brothers
Emerging Markets Income Fund II Inc., requiring
pre-approval by the Audit Committee for the period May 6,
2003 through May 31, 2004, which included the issuance of
reports on internal control under SAS No. 70 relating to
various Citigroup Asset Management ("CAM") entities, were
$558,750; all of which were pre-approved by the Audit
Committee.
(e) (1) Audit Committee's pre-approval policies and
procedures described in paragraph (c) (7) of Rule 2-01 of
Regulation S-X.
The Charter for the Audit Committee (the "Committee") of
the Board of each registered investment company (the
"Fund") advised by Smith Barney Fund Management LLC or
Salomon Brothers Asset Management Inc or one of their
affiliates (each, an "Adviser") requires that the
Committee shall approve (a) all audit and permissible
non-audit services to be provided to the Fund and (b) all
permissible non-audit services to be provided by the
Fund's independent auditors to the Adviser and any
Covered Service Providers if the engagement relates
directly to the operations and financial reporting of the
Fund. The Committee may implement policies and procedures
by which such services are approved other than by the
full Committee.
The Committee shall not approve non-audit services that
the Committee believes may impair the independence of the
auditors. As of the date of the approval of this Audit
Committee Charter, permissible non-audit services include
any professional services (including tax services), that
are not prohibited services as described below, provided
to the Fund by the independent auditors, other than those
provided to the Fund in connection with an audit or a
review of the financial statements of the Fund.
Permissible non-audit services may not include: (i)
bookkeeping or other services related to the accounting
records or financial statements of the Fund; (ii)
financial information systems design and implementation;
(iii) appraisal or valuation services, fairness opinions
or contribution-in-kind reports; (iv) actuarial services;
(v) internal audit outsourcing services; (vi) management
functions or human resources; (vii) broker or dealer,
investment adviser or investment banking services; (viii)
legal services and expert services unrelated to the
audit; and (ix) any other service the Public Company
Accounting Oversight Board determines, by regulation, is
impermissible.
Pre-approval by the Committee of any permissible
non-audit services is not required so long as: (i) the
aggregate amount of all such permissible non-audit
services provided to the Fund, the Adviser and any
service providers controlling, controlled by or under
common control with the Adviser that provide ongoing
services to the Fund ("Covered Service Providers")
constitutes not more than 5% of the total amount of
revenues paid to the independent auditors during the
fiscal year in which the permissible non-audit services
are provided to (a) the Fund, (b) the Adviser and (c) any
entity controlling, controlled by or under common control
with the Adviser that provides ongoing services to the
Fund during the fiscal year in which the services are
provided that would have to be approved by the Committee;
(ii) the permissible non-audit services were not
recognized by the Fund at the time of the engagement to
be non-audit services; and (iii) such services are
promptly brought to the attention of the Committee and
approved by the Committee (or its delegate(s)) prior to
the completion of the audit.
(f) N/A
(g) Non-audit fees billed by the Accountant for services
rendered to Salomon Brothers Emerging Markets Income Fund
II Inc. and CAM and any entity controlling, controlled
by, or under common control with CAM that provides
ongoing services to Salomon Brothers Emerging Markets
Income Fund II Inc. were $2.0 million and $6.4 million
for the years ended 5/31/04 and 5/31/03.
(h) Yes. The Salomon Brothers Emerging Markets Income Fund II
Inc.'s Audit Committee has considered whether the
provision of non-audit services that were rendered to
Service Affiliates which were not pre-approved (not
requiring pre-approval) is compatible with maintaining
the Auditor's independence. All services provided by the
Accountant to the Salomon Brothers Emerging Markets
Income Fund II Inc. or to Service Affiliates which were
required to be pre-approved were pre-approved as
required.
ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS.
Not applicable.
ITEM 6. [RESERVED]
ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR
CLOSED-END MANAGEMENT INVESTMENT COMPANIES.
The Board of Directors of the Fund has delegated the authority
to develop policies and procedures relating to proxy voting to
the Manager. The Manager is part of Citigroup Asset Management
("CAM"), a group of investment adviser affiliates of
Citigroup, Inc. ("Citigroup"). Along with the other investment
advisers that comprise CAM, the Manager has adopted a set of
proxy voting policies and procedures (the "Policies") to
ensure that the Manager votes proxies relating to equity
securities in the best interest of clients.
In voting proxies, the Manager is guided by general fiduciary
principles and seeks to act prudently and solely in the best
interest of clients. The Manager attempts to consider all
factors that could affect the value of the investment and will
vote proxies in the manner that it believes will be consistent
with efforts to maximize shareholder values. The Manager may
utilize an external service provider to provide it with
information and/or a recommendation with regard to proxy
votes. However, such recommendations do not relieve the
Manager of its responsibility for the proxy vote.
In the case of a proxy issue for which there is a stated
position in the Policies, CAM generally votes in accordance
with such stated position. In the case of a proxy issue for
which there is a list of factors set forth in the Policies
that CAM considers in voting on such issue, CAM votes on a
case-by-case basis in accordance with the general principles
set forth above and considering such enumerated factors. In
the case of a proxy issue for which there is no stated
position or list of factors that CAM considers in voting on
such issue, CAM votes on a case-by-case basis in accordance
with the general principles set forth above. Issues for which
there is a stated position set forth in the Policies or for
which there is a list of factors set forth in the Policies
that CAM considers in voting on such issues fall into a
variety of categories, including election of directors,
ratification of auditors, proxy and tender offer defenses,
capital structure issues, executive and director compensation,
mergers and corporate restructurings, and social and
environmental issues. The stated position on an issue set
forth in the Policies can always be superseded, subject to the
duty to act solely in the best interest of the beneficial
owners of accounts, by the investment management professionals
responsible for the account whose shares are being voted.
Issues applicable to a particular industry may cause CAM to
abandon a policy that would have otherwise applied to issuers
generally. As a result of the independent investment advisory
services provided by distinct CAM business units, there may be
occasions when different business units or different portfolio
managers within the same business unit vote differently on the
same issue.
In furtherance of the Manager's goal to vote proxies in the
best interest of clients, the Manager follows procedures
designed to identify and address material conflicts that may
arise between the Manager's interests and those of its clients
before voting proxies on behalf of such clients. To seek to
identify conflicts of interest, CAM periodically notifies CAM
employees (including employees of the Manager) in writing that
they are under an obligation (i) to be aware of the potential
for conflicts of interest with respect to voting proxies on
behalf of client accounts both as a result of their personal
relationships and due to special circumstances that may arise
during the conduct of CAM's and the Manager's business, and
(ii) to bring conflicts of interest of which they become aware
to the attention of compliance personnel. The Manager also
maintains and considers a list of significant relationships
that could present a conflict of interest for the Manager in
voting proxies. The Manager is also sensitive to the fact that
a significant, publicized relationship between an issuer and a
non-CAM affiliate might appear to the public to influence the
manner in which the Manager decides to vote a proxy with
respect to such issuer. Absent special circumstances or a
significant, publicized non-CAM affiliate relationship that
CAM or the Manager for prudential reasons treats as a
potential conflict of interest because such relationship might
appear to the public to influence the manner in which the
Manager decides to vote a proxy, the Manager generally takes
the position that non-CAM relationships between Citigroup and
an issuer (e.g. investment banking or banking) do not present
a conflict of interest for the Manager in voting proxies with
respect to such issuer. Such position is based on the fact
that the Manager is operated as an independent business unit
from other Citigroup business units as well as on the
existence of information barriers between the Manager and
certain other Citigroup business units.
CAM maintains a Proxy Voting Committee, of which the Manager
personnel are members, to review and address conflicts of
interest brought to its attention by compliance personnel. A
proxy issue that will be voted in accordance with a stated
position on an issue or in accordance with the recommendation
of an independent third party is not brought to the attention
of the Proxy Voting Committee for a conflict of interest
review because the Manager's position is that to the extent a
conflict of interest issue exists, it is resolved by voting in
accordance with a pre-determined policy or in accordance with
the recommendation of an independent third party. With respect
to a conflict of interest brought to its attention, the Proxy
Voting Committee first determines whether such conflict of
interest is material. A conflict of interest is considered
material to the extent that it is determined that such
conflict is likely to influence, or appear to influence, the
Manager's decision-making in voting proxies. If it is
determined by the Proxy Voting Committee that a conflict of
interest is not material, the Manager may vote proxies
notwithstanding the existence of the conflict.
If it is determined by the Proxy Voting Committee that a
conflict of interest is material, the Proxy Voting Committee
is responsible for determining an appropriate method to
resolve such conflict of interest before the proxy affected by
the conflict of interest is voted. Such determination is based
on the particular facts and circumstances, including the
importance of the proxy issue and the nature of the conflict
of interest. Methods of resolving a material conflict of
interest may include, but are not limited to, disclosing the
conflict to clients and obtaining their consent before voting,
or suggesting to clients that they engage another party to
vote the proxy on their behalf.
ITEM 8. [RESERVED]
ITEM 9. CONTROLS AND PROCEDURES.
(a) The registrant's principal executive officer and
principal financial officer have concluded that the
registrant's disclosure controls and procedures (as
defined in Rule 30a- 3(c) under the Investment
Company Act of 1940, as amended (the "1940 Act")) are
effective as of a date within 90 days of the filing
date of this report that includes the disclosure
required by this paragraph, based on their evaluation
of the disclosure controls and procedures required by
Rule 30a-3(b) under the 1940 Act and 15d-15(b) under
the Securities Exchange Act of 1934.
(b) There were no changes in the registrant's internal
control over financial reporting (as defined in Rule
30a-3(d) under the 1940 Act) that occurred during the
registrant's last fiscal half-year (the registrant's
second fiscal half-year in the case of an annual
report) that have materially affected, or are likely
to materially affect the registrant's internal
control over financial reporting.
ITEM 10. EXHIBITS.
(a) Code of Ethics attached hereto.
Exhibit 99.CODE ETH
(b) Attached hereto.
Exhibit 99.CERT Certifications pursuant to section 302
of the Sarbanes-Oxley Act of 2002
Exhibit 99.906CERT Certifications pursuant to Section 906
of the Sarbanes-Oxley Act of 2002
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, the registrant has duly caused this Report to be
signed on its behalf by the undersigned, there unto duly authorized.
SALOMON BROTHERS EMERGING MARKETS INCOME FUND II INC.
By: /s/ R. Jay Gerken R. Jay Gerken
Chief Executive Officer of
SALOMON BROTHERS EMERGING MARKETS INCOME FUND II INC.
Date: August 9, 2004
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
By: /s/ R. Jay Gerken
R. Jay Gerken
Chief Executive Officer of
SALOMON BROTHERS EMERGING MARKETS INCOME FUND II INC.
Date: August 9, 2004
By: /s/ ANDREW B. SHOUP
ANDREW B. SHOUP
Chief Administrative Officer of
SALOMON BROTHERS EMERGING MARKETS INCOME FUND II INC.
Date: August 9, 2004